I think that we are entering a new era of investing where the old strategies and advice will no longer apply.
What worked for the previous 40 years may not be applicable today or in the future because of the sheer amount of debt the United States has.
It’s the first time in history that the world’s reserve currency (US dollar) is a fiat currency (not backed by anything), and national debt is greater than GDP.
Monetary debasement (dollar loses value and purchasing power) will become a major issue in the future. I think it will be important to look at your investments based on whether or not they will create real wealth, breakeven with monetary debasement, or fall behind.
I created the five categories below as a guide to think about what sort of stocks and ETFs might do well in the future compared to each other. This isn’t investment advice. It’s thinking about how the United States will deal with its debt problem, and how you can understand what investments might benefit the most.
1. Productivity Premium
Productivity premium stocks and ETFs are currently the major tech companies. These companies include the Magnificent Seven and other companies that are involved in AI, cloud computing, and data collection and processing.
These companies offer real productivity benefits where the economy becomes more efficient. This means things like tasks are completed faster or less resources are needed to complete a task.
We have seen productivity premium stocks and ETFs outperform the broader market for the past five years.
The Magnificent Seven, tech ETFs, semiconductor ETFs, and growth ETFs have had returns greater than the broader market AND gold (which I use as a measure of monetary debasement).
Uncertainties
There are several major uncertainties in productivity premium companies.
I don’t know how many articles I’ve seen that have mentioned the “AI bubble” lately.
I have no clue if we are in a tech bubble or AI bubble, but the reason people keep investing in these companies is because they do offer the potential to revolutionize the economy through productivity improvements.
The question is will there be a price where Nvidia, Microsoft, and the other major players are too high?
There’s also the risk that AI doesn’t turn out to be as productive as people think.
ChatGPT and Gemini are great for what they do, but we haven’t seen robots stocking shelves or drones delivering our goods (at least on a massive scale). Those are the types of things that skyrocket productivity. Are these things even possible in my lifetime?
AI is also very expensive from a spending and resource point of view. AI datacenters require vast amounts of electricity and water to function. Tech companies are spending billions of dollars each year, but what happens if all that spending doesn’t turn into a profit soon enough? Eventually investors are going to want to see something revolutionary.
What if China introduces an AI that is cheaper and just as powerful as an American AI? What would that do to the valuations of the major tech companies?
There’s no doubt AI is the future, but no one knows the road that will be traveled to get there.
2. Liquidity Monetization
Liquidity monetization companies use the increase in money supply and inflation to raise their prices and keep their margins healthy.
These companies belong to industries like finance, asset management, insurance, and certain utilities.
Think about the essential services that we need to live in today’s world. We need somewhere to keep our money, insurance, trash pickup, electricity, gas, water, etc. These are the bills you pay each month.
If inflation stays high and the dollar continues losing value, these types of companies will just continue raising their prices year after year to keep up.
It’s unlikely that these companies will outperform monetary debasement in the long run because they aren’t creating anything that increases productivity or real value.
3. Government Spending
Government spending companies are heavily tied to the money they receive from the federal government.
The government spends each year on programs like Medicare and Medicaid. They also spend on national defense. These are included in the Federal budget.
I’m not an expert on Medicare or Medicaid, but the government is highly involved in pricing, reimbursements, and all the official regulations.
The industries included in government spending are: pharmaceuticals, healthcare, medical devices, military, and defense.
These companies grow because the government pays them.
Who Will the Government Pay in the Future?
I think it’s safe to say that the government will continue to fund Medicare, Medicaid, and the Defense department. If they don’t then we’d be in a lot of trouble.
But are there other industries that the government might get more involved in?
I suspect that the US government might get more involved in AI. We’ve seen the government take a 10% stake in Intel. They did this because they know AI is the future and want to “win” against China. They will say it is about “national security”.
Do you think that the United States wants to fall behind China?
Think about the space race or arms race with the Soviet Union during the cold war. The United States spent massive amounts of money to make sure the United States came out on top.
I would assume as the AI race heats up the United States will spend more.
However, it’s hard to know what specific companies the United States would want to get involved with (unless you are a politician trading).
It depends on what companies the US invests in.
If it’s a military company producing drones, then there’s potential for real growth because it’s something that changes warfare.
If there’s another pandemic and we need a vaccine or treatment, then pharma companies might benefit in the short term.
It really all just depends on what future events occur, but unfortunately we can’t predict the future.
4. The Real Economy
The real economy includes companies that are in the consumer discretionary and consumer staples sectors.
Their profits rely on people spending money in their stores or online. However, these companies also have to purchase or create their goods to sell, which will become more expensive over time. Because of that, they will have to pass those costs onto the consumer and it will depend on economic conditions if people are willing to spend their money.
For example, if people don’t have disposable income because groceries are too expensive, then they might put off that home improvement project until they can afford it.
For me, it’s hard to get really excited about any company in the real economy. There might be some big new exciting product that comes out that everyone loves, but even then those types of things tend to be short lived.
If there are winners in the long run, I think the big established brands like Walmart and Costco will nominally keep up. They offer groceries (which everyone needs) and other consumer goods. They both also have subscription models which they can increase in price throughout the years to keep up with inflation.
Other potential winners might include companies that cater specifically to high income individuals. Wealthy people have enough money to keep buying what they want.
I find it really difficult to believe that the average American is going to be able to continue spending enough to support these companies enough to outpace monetary debasement in the long term.
These companies are dealing with a double edge sword as well.
Let’s say Walmart starts using robots to stock shelves. That’s good for Walmart because in the long run it’s cheaper to use a robot than to use a human who requires a wage, insurance, and other benefits. It’s a productive win.
The problem is that humans get paid for their labor and use that money to buy goods and services. Robots don’t do that. So, it might be beneficial for Walmart to use robots for labor, but it also hurts regular people who might lose their jobs and not be able to buy goods from Walmart.
5. Real/Scarce Assets
The last category of investments in a high debt to GDP world are real assets.
This includes industries such as: oil, gold, silver, mining, rare earths, and other scarce assets.
These companies work with real assets that are scarce, meaning there’s only a certain amount of them in the world.
My theory is that because these real assets are scarce, as the dollar devalues over time, the value of these assets will increase in price.
Rare earth minerals have been in the news lately because they are needed for all sorts of products that we use. The problem is that they are only found in certain countries and there’s only a certain amount of them.
Summary
It’s my opinion that because the United States is in so much debt, the previous strategies and advice about investing will become obsolete. The government will try to outgrow the national debt by decreasing interest rates, which will increase inflation and devalue the dollar.
A new perspective to think about how to view your investments is to categorize them based on:
- Productivity Premium
- Liquidity Monetization
- Government Spending
- The Real Economy
- Real/Scare Assets